Milton Friedman goes to China

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There’s a famous economics fable of Milton Friedman going to China or India, and what happens is another way to explain The Broken Window Fallacy, in a more Socratic way. Some refer to this as Shovels vs. Spoons. The story predates Milton, but he did tell variants of it and popularized it.

Uncle Milton goes to China

Milton was in China/India in the 1960s and visiting a worksite where a new canal was being built.

He was shocked to see that, instead of modern tractors and earth movers, thousands of workers had shovels and were toiling away. He asked the foreman, "why there were so few machines?"

The government bureaucrat proudly explains, “You don’t understand. This is a jobs program.”

To which Milton replied, “Oh, I thought you were trying to build a canal. If it’s jobs you want, you should give these workers spoons, not shovels!"

The point is that value (Money) is derived from the product of work (the output / canal), not the input or how much you pay for it

No matter how much you're overpaying, you're still not going to come out ahead (“no country has taxed themselves into prosperity”, though a few have tried). The reason is because all that money came out of the taxpayers pocket (and thus the economy) in the first place. The only true new value was the product (the canal), everything else was loss (borrowed/stolen money). By doing it slower, and more costly, there was more loss.

So if government pays 100 people to do the work that 5 guys could do with earth moving equipment, you come out behind because you wasted the productivity (potential output) of 95 people. Some will claim that you employed an extra 95 people, but that benefit is more than offset that you had to take that money out of the economy (plus overhead/bureaucracy/waste) to pay them. Thus the hidden cost is those 95 workers could have been doing something else to adding REAL value to humanity or their own lives, instead of just wasted paying for 100 people to dig a ditch that 5 could have done without governments help. Even if those 95 did nothing, and sat at home, that is less a burden on the economy/taxpayers than getting paid to do something that could have been done better without them.


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